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Accounting Roundup — February 2016

Welcome to the February 2016 edition of Accounting Roundup. Highlights of this issue include the following:

The FASB’s release of ASU 2016-02, its new standard on accounting for leases.

The SEC staff’s remarks on implementation issues associated with the FASB’s and IASB’s new revenue standard.

The SEC’s release of a final rule on cross-border security-based swaps and a proposed rule on covered broker-dealer provisions.

Be sure to monitor upcoming issues of Accounting Roundup for new developments. We value your feedback and would appreciate any comments you may have on this publication. Take a moment to tell us what you think by sending us an e-mail at accountingstandards@deloitte.com.

Accounting — New Standards and Exposure Drafts

Leases

FASB Issues ASU on Leases

Affects: All entities.

Summary: On February 25, 2016, the FASB issued ASU 2016-02, its new standard on accounting for leases. ASU 2016-02 introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in ASC 606, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore, the ASU addresses other concerns related to the current leases model. For example, the ASU eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. The standard also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure.

The new model represents a wholesale change to lease accounting. As a result, entities will face significant implementation challenges during the transition period and beyond, such as those related to:

Applying judgment and estimating.

Managing the complexities of data collection, storage, and maintenance.

Enhancing information technology systems to ensure their ability to perform the calculations necessary for compliance with reporting requirements.

Refining internal controls and other business processes related to leases.

Determining whether debt covenants are likely to be affected and, if so, working with lenders to avoid violations.

Addressing any income tax implications.

Editor’s Note: The IASB issued its own leases standard, IFRS 16, in January 2016. Although the leases project was a convergence effort and the boards conducted joint deliberations, there are several notable differences between the two standards. For instance, the IASB’s standard has a single lessee accounting model while the FASB’s has a dual lessee accounting model.

The primary objective of the leases project was to address the off-balance-sheet financing concerns related to lessees’ operating leases. The boards tried to develop an approach that would require all operating leases to be recorded on the balance sheet, but that proved to be no small task. During the deliberations, the boards had to grapple with questions such as (1) whether an arrangement is a service or a lease, (2) what amounts should be initially recorded on the lessee’s balance sheet for the arrangement, (3) how to reflect the effects of leases in a lessee’s statement of comprehensive income (a point on which the FASB and IASB were unable to converge), and (4) how to apply the resulting accounting in a cost-effective manner.

Next Steps: The new guidance will be effective for public business entities for annual periods beginning after December 15, 2018 (e.g., calendar periods beginning on January 1, 2019), and interim periods therein. For all other entities, the ASU will be effective for annual periods beginning after December 15, 2019 (e.g., calendar periods beginning on January 1, 2020), and interim periods thereafter. Early adoption will be permitted for all entities.

Editor’s Note: As companies prepare to issue their annual financial statements, they should consider the guidance in SAB Topic 11.M, which requires SEC registrants to disclose the effect of new pronouncements that have been issued but are not yet effective. Although SAB Topic 11.M applies to SEC registrants, it is considered best practice for nonregistrants to also provide these disclosures.

Accounting — Other Key Developments

Post-Implementation Reviews

FAF Completes Post-Implementation Review of FASB Statement 128

Affects: All entities.

Summary: On February 24, 2016, the FAF announced that it has completed its post-implementation review (PIR) of FASB Statement 128, which provided guidance on earnings per share before being codified in ASC 260. The PIR report concludes that Statement 128 has achieved its goals of simplifying the guidance on calculating earnings per share and increasing comparability with IFRSs. Further, the FAF believes that the Statement provides financial statement users with helpful information. The PIR team did not make any recommendations on the basis of its review. The FAF also announced that it will not conduct another PIR for the next few years.

Other Resources: For more information, see the press release on the FAF’s Web site as well as the FASB’s response letter to the FAF on the FASB’s Web site.

Revenue Recognition

The New Revenue Standard — SEC Staff Remarks on TRG Activities

Affects: All entities.

Summary: At the 43rd Annual Securities Regulation Institute (sponsored by the Northwestern Pritzker School of Law), Wesley R. Bricker, deputy chief accountant in the SEC’s Office of the Chief Accountant (OCA), spoke about the implementation of the new revenue standard (issued as ASU 2014-09 by the FASB and IFRS 15 by the IASB). His remarks followed a recent announcement that the IASB has completed its decision-making process related to clarifying the new revenue standard and does not plan to schedule any more TRG meetings for IFRS constituents. The following are some key points from Mr. Bricker’s remarks on the new revenue standard and the TRG:

The SEC staff views the new, largely converged revenue standard as an improvement in financial reporting for both domestic and foreign filers.

The SEC staff continues to support the TRG as a mechanism to promote more consistent application of the new revenue standard.

While the IASB will no longer attend TRG meetings, the FASB will continue to address implementation issues and has scheduled three TRG meetings for 2016. Further, TRG meeting participants should be prepared to view matters from a global perspective.

The SEC staff attends TRG meetings and will use the discussions as a basis to assess the appropriateness of domestic and foreign registrants’ revenue recognition policies. Registrants should therefore monitor and consider TRG discussions and meeting minutes (which are available on the standard setters’ Web sites) to develop reasonable revenue recognition accounting policies.

The SEC staff strongly encourages domestic and foreign filers to consult with the OCA if they expect to adopt an accounting policy that is inconsistent with TRG discussions (i.e., in which general agreement was reached and documented in meeting minutes).

Auditing Developments

AICPA

AICPA Issues Interpretation on Reviews Performed Under Both SSARSs and International Standards

Affects: Entities that perform review engagements.

Summary: On February 18, 2016, the AICPA issued an interpretation of AR-C Section 90 that addresses whether it is permissible for an accountant’s independent review report to indicate that a review engagement was conducted under the international standard ISRE 2400 in addition to being conducted under SSARSs. The interpretation concludes that such a statement is allowed as long as the entity complies with both sets of standards.

CAQ

CAQ Releases Highlights of November 2015 Meeting Between IPTF and SEC Staff

Affects: All entities.

Summary: On February 11, 2016, the CAQ released highlights of the November 17, 2015, joint meeting between the IPTF and the SEC staff. Topics discussed at the meeting included the following:

Monitoring inflation in certain countries and determining “highly inflationary“ status on the basis of the International Monetary Fund’s World Economic Outlook database as of October 2015.

The requirement to keep the financial statements current in a business combination transaction registered on Form F-4.

The SEC staff’s observations about foreign private issuers’ use of the IFRS XBRL Taxonomy.

Next Steps: The next IPTF meeting is scheduled for May 17, 2016.

CAQ Releases Cybersecurity Resource

Affects: Audit committees, investors, management, and others.

Summary: In February 2016, the CAQ released a resource that explores the role public-company auditors can play in enhancing cybersecurity. Specifically, the publication addresses cybersecurity-related procedures auditors can perform with respect to audits of entities’ (1) financial statements, (2) internal controls over financial reporting, and (3) financial statement disclosures.

PCAOB

SEC Seeks Comments on PCAOB Rules on Audit Transparency

Affects: Auditors.

Summary: On February 8, 2016, the SEC issued a notice to solicit public comments on the PCAOB’s proposed rules that would require audit firms to disclose the name of the engagement partner and information about certain audit participants on a new Form AP.

Governmental Accounting and Auditing Developments

GASB

Affects: Entities reporting under financial accounting and reporting standards for state and local governments.

Summary: On February 11, 2016, the GASB issued Statement 80, which provides guidance on blending requirements for certain component units. Statement 80 clarifies “how certain component units incorporated as not-for-profit corporations should be presented in the financial statements of the primary state or local government.“ Specifically, such component units must be “blended into the primary state or local government’s financial statements in a manner similar to a department or activity of the primary government.“

Next Steps: Statement 80 is effective for reporting periods beginning after June 15, 2016. Early application is encouraged.

Other Resources: For more information, see the press release on the GASB’s Web site.

GASB Proposes Guidance on Lease Contracts

Affects: Entities reporting under financial accounting and reporting standards for state and local governments.

Summary: On February 8, 2016, the GASB issued an ED on leases that would “establish a single approach for state and local governments to report leases based on the principle that leases are financings of the right to use an underlying asset.“ The proposal would require lessees “to recognize a lease liability and an intangible asset representing [their] right to use the leased asset,“ while lessors “would be required to recognize a lease receivable and a deferred inflow of resources.“ In addition, the ED provides guidance on the accounting for lease terminations and modifications, sale-leaseback transactions, nonlease components embedded in lease contracts, and related-party leases.

International

IPSASB Proposes Amendments to Cash Basis of Accounting

Affects: Public-sector entities.

Summary: On February 3, 2016, the IPSASB published an ED that would amend its IPSAS on financial reporting under the cash basis of accounting. The primary objectives of the ED are to (1) facilitate adoption of the cash-basis IPSAS by changing certain provisions from requirements to “encouragements“; (2) align the standard’s requirements and encouragements better with the “equivalent accrual IPSASs, except where such differences are appropriate to reflect adoption of the cash basis“; and (3) clarify how the cash-basis IPSAS fits in with the IPSASB’s standard-setting strategy.

Next Steps: Comments on the ED are due by July 31, 2016.

Other Resources: For more information, see the press release on IFAC’s Web site.

Regulatory and Compliance Developments

SEC

SEC and FDIC Issue Proposed Rule on Covered Broker-Dealer Provisions

Affects: Broker-dealers.

Summary: On February 17, 2016, the SEC and FDIC issued a proposed rule that establishes certain “provisions applicable to the orderly liquidation of covered brokers and dealers.“ The proposal is being issued in response to a mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Next Steps: Comments on the proposed rule are due 60 days after the date of its publication in the Federal Register.

SEC Publishes Final Rule on Cross-Border Security-Based Swaps

Affects: SEC registrants.

Summary: On February 10, 2016, the SEC issued a final rule related to cross-border security-based swaps. Under the final rule, which is being issued in response to a mandate of the Dodd-Frank Act, “a non-U.S. company that uses personnel located in a U.S. branch or office to arrange, negotiate, or execute a security-based swap transaction in connection with its dealing activity [must] include that transaction in determining whether it is required to register as a security-based swap dealer.“

Next Steps: The final rule will become effective on April 19, 2016.

Other Resources: For more information, see the press release on the SEC’s Web site.

Summary: On February 9, 2016, the staff in the SEC’s Division of Corporation Finance issued a C&DI for issuers of asset-backed securities that addresses certain changes to the EDGAR system as a result of the adoption of revisions to Regulation AB and new Exchange Act Rule 15Ga-2.

SEC Updates EDGAR Filer Manual and Technical Specifications

Affects: SEC registrants.

Summary: On January 25, 2016, the SEC updated its EDGAR System Filer Manual (volumes I and II) to include new submission forms related to the funding portal. In addition, the Commission issued technical specifications for CF Portal EDGAR XML submission types.

Other Resources: For more information, see the EDGAR page on the SEC’s Web site.

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Leadership Changes

FASB: On February 23, 2016, the FAF trustees announced that Christine Ann Botosan has been appointed to the FASB for a five-year term beginning on July 1, 2016.

GASAC: On February 23, 2016, the FAF board of trustees announced that Jacqueline Reck has been appointed vice-chairman of the GASAC to replace James Reardon. Ms. Reck’s appointment is effective immediately. The trustees also announced the appointment of Benjamin Barnes to GASAC.

IASB: On February 12, 2016, the IFRS Foundation trustees announced that Hans Hoogervorst has been reappointed as IASB chairman for a second five-year term beginning on July 1, 2016. The trustees also announced that Ian Mackintosh will be retiring from his position as IASB vice-chairman when his first term ends on June 30, 2016. Further, on February 23, 2016, the trustees announced the reappointment of Takatsugu Ochi for a second three-year term and the retirement of Pat Finnegan, both effective on June 30, 2016.

SEC: On February 4, 2016, the SEC announced the new members of its Advisory Committee on Small and Emerging Companies.